What led to the SoftBank-Snapdeal fallout

As SoftBank nears a deal to sell what was its largest portfolio company in India, we a deep dive into how Snapdeal's valuation fell dramatically from $6.5bn to $1bn, and why the Japanese investor stalled the flow of capital into the e-tailer over the past six months... ​Samidha Sharma | TNN | May 01, 2017, 07:13 IST

In 2014, Masayoshi Son, Soft Bank's maverick billionaire founder tasked Nikesh Arora, a hotshot Google executive, who was about to join the Japanese telecom and internet major, with closing out a prospective investment in India.The deal was stuck on differences in valuation between SoftBank and the young entrepreneur.

Masa had poached India-born Arora at the time and was in the midst of reinventing his organisation. SoftBank 2.0 is what the project was called, the vision was to make the group more global and take bets on technology startups. India was one such market the sprawling technology group was eyeing, and Arora was the man to take Masa's plan to fruition.

On his India trip almost three years back, Arora met Kunal Bahl, the founder and CEO of Snapdeal, an online marketplace which Masa was keen to invest in. At the time Snapdeal was competing with Flipkart in India's hot e-commerce market which was about $6 billion in size. Arora convinced Bahl to agree to take SoftBank's money by offering a slightly better valuation.October 2014, marked the arrival of SoftBank as Snapdeal's largest investor as it led a $627-million financing round valuing the online marketplace at $1.2 billion and got itself a 33% stake in the company .

Bahl and his co founder Rohit Bansal grew up in Delhi as school friends, went through multiple pivots (a startup jargon which means the change of a company's business model) since they began in 2007. In its latest avatar, Snapdeal wanted to be the Alibaba of India. Having backed the Chinese internet giant in its infancy, and having gained unprecedented returns after the muchballyhoed Alibaba IPO, SoftBank's bet on Snapdeal wasn't surprising at the time.

Just a few months before Snapdeal's funding round was announced another seminal event had unfolded -the Bengalurubased Flipkart racked up $1 billion from a clutch of investors, valued at $7 billion. The e-commerce sweepstakes were only starting to play out with such an enormous and never-seen-before slug of capital chasing the Indian online retail story.

Snapdeal's Rise Between 2014-15

After raising its largest financing round, Snapdeal started pushing the pedal. It wanted to compete head on with Flipkart, the country's largest online retailer which was growing on the back of massive smartphone sales. Gross merchandise value -or GMV ,a proxy indicator for growth in the e-commerce sector -was gaining currency rapidly and was being used to burnish the valuations of these companies.

The Seattle-based online behemoth Amazon, which so far had been testing the India market, decided to throw down the gauntlet. In September 2014, its visionary founder Jeff Bezos famously stood on a truck outside the company's Bengaluru headquarters along with his India chief Amit Agarwal, waving a $2-billion cheque.

Amazon's founder Jeff Bezos in Bengaluru in 2014

From here on, the Indian ecommerce story started to change. Snapdeal reported a 301% jump in GMV for the year ended March 2015, according to documents put up by SoftBank during its earnings results. Between 2014 to 2015, the Indian e-commerce market almost doubled from $6 billion to $11.5 billion as discounting peaked. Still the No. 2 player, Snapdeal went on to successfully raise more money on the back of its growth.

When Snapdeal was racing ahead on the GMV front, Alibaba's arch rival, China's Tencent, expressed interest in the company. The internet major had offered to put $350 million at a $5-billion valuation, people privy to the talks said.We found out from sources that SoftBank wasn't keen on having Tencent on board and pushed for an Alibaba entry into Snapdeal.In the meantime, the web retailer went out and snagged the mobile wallet startup Freecharge in a $400-million deal, largely done through a share-swap to build its payments business. Then in August 2015, the e-tailer closed a fresh financing round of $500 million with Alibaba and Foxconn, valuing it at $4.8 billion. Tencent was ke pt out. Significantly enough, last month, the internet behemoth behind WeChat messenger invested in Flipkart.

2016: From GMV Race To Turning Profitable

Snapdeal's revenue growth started to slow down sharply from 450% for the year ending March 2015 to 56% at Rs 1,457 crore a year later. Amazon was weaning away market share while Flipkart was stagnating. The overall industry had become sluggish, GMV numbers were flat for the industry at $11-12 billion. Now, Snapdeal had begun talking down GMV . Instead, it wanted to draw up a path to profitability -Bahl had been quoted as saying this publicly. Even as the change in strategy was starting to play out, Snapdeal got some more funds, this time from one of the world's largest pension funds,Ontario Teachers Pension Plan at a $6.5 billion valuation. The new investor had bought $150 million of secondary shares from Snapdeal's early investors and put $50 million into the company. By the middle of 2016, the e-tailer changed tack completely and figured fighting the war chest of Amazon wouldn't be easy, but the sudden news of Arora's departure in June last year from SoftBank was going to alter Snapdeal's future.

The Nikesh Arora Factor

We'd met Arora at SoftBank's Silicon Valley office a few days after he'd resigned. He'd said the Indian companies SoftBank had funded during his tenure will find support from Masa. But the Indian e-commerce sector had changed, he'd admitted. “In the last two years, what has happened is that Jeff Bezos (Amazon founder) has come out and said he wants to win India at all cost. He will spend billions of dollars in India and that's a new competitive fact. You have to figure out a way to compete with that. The question is does it become like an Alibaba JD, a two-player China market, or a multi-player market?That depends on execution,“ he said. Arora was of the view that Snapdeal was moving from negative to positive gross margins. “I know Snapdeal has started focusing on profitable GMV instead of just GMV ,“ he had said then.

A person close to the company said, “His ( Arora) moving out of SoftBank was a big blow for Bahl and Snapdeal. The present team is trying to obliterate his legacy and his investment calls were being questioned. This is why SoftBank asked Snapdeal to chase growth, the opposite of what Arora was telling the company to do.“ After Arora, who was anointed by Masa as his successor, departed, others in his team like Deep Nishar, Kabir Misra (who's now on the Snapdeal board) and Alok Sama began actively liaising with the Indian e-commerce company . Masa also stepped in. He was now keeping himself abreast with what was going on at one of his earliest bets on India internet.

While Arora was still around, he along with the Snapdeal founders had strung together a $350-mil lion financing from existing investor eBbay, which would have valued the e-commerce company at $6.5 billion, sources said. This deal would have involved folding up eBay india into Snapdeal. But this didn't come through. Last month, eBay India, which now has only 4-5% holding in Snapdeal, invested in Flipkart, and sold its local unit in the process.

We'd reached out to Snapdeal and SoftBank spokespersons through an emailed questionnaire on the events leading up to the current situation which did not elicit a response.

Sale To Alibaba Falls Through

After Arora's exit, SoftBank started to press for a sale to Alibaba. People who were privy to the goings-on said SoftBank wanted to merge Snapdeal with Paytm's e-commerce marketplace and Freecharge with Paytm's payments play. This is when Snapdeal made another so-called pivot with a Rs 200 crore brand relaunch targeting smaller town customers.

While the discussions were on in full swing, the Jack Ma-led Alibaba didn't agree to the final deal, and after Diwali spends, Snapdeal found itself staring at its fast depleting cash reserves. Alibaba and its subsidiary Alipay are investors in Paytm.

Foxconn, Paypal Bid For Freecharge Stake

Even as SoftBank was trying to pull off the Alibaba Snapdeal transaction, Freecharge, which had been scouting for funds since 2015, was closing in on a deal with Foxconn sometime around July last year. The Taiwanese manufacturer of Apple iPhones was ready to pump in $300 million, valuing Freecharge at around $800 million. SoftBank was willing to participate with half of that sum, but the deal never closed.Then came American payments giant PayPal, which had been wanting to get a slice of India. In November last year, PayPal proposed an overall $500-million funding in Freecharge, giving it a 51% stake.

This would involve buying out investors in Jasper Infotech to get shares of Freecharge and putting about $300 million of capital in the mobile wallet firm at a valuation of $800 million or so. Jasper Infotech is the parent of Snapdeal and Freecharge. The deal had a term which would give PayPal a put option to take over the remaining 49% stake in the e-wallet venture over the next few years. This transaction, too, fell through.

“It started to look like SoftBank was stalling external investors because they wanted Snapdeal to merge with a bigger entity and Alibaba was a preferred partner. But post Diwali they figured Alibaba was not interested and by that time there was urgent need for capital at Snapdeal,“ said another person with knowledge of the matter.

SoftBank Proposes To Sell Freecharge To Paytm

After both these deals did not materialise, SoftBank put on the table a $1-billion funding proposal for Snapdeal in December last year when Masa was on an India visit.This would entail SoftBank buying Freecharge for $600 million, selling it to Paytm and subsequently pumping $400 million into Jasper Infotech, the parent of Snapdeal.At this time SoftBank valued the e-commerce player at around $3 billion. This would also let SoftBank get a 10-15% stake in Paytm, which was reaping the benefits of the Indian government's demonetisation move announced in November. But the funds did not come.

SoftBank was still pushing for growth asking Snapdeal to bulk up its GMV . There had also been talks of a Freecharge sale to Ola Money , the payments platform run by another SoftBank portfolio company Ola -the transportation startup which is fighting Uber in India. Masa had offered a $1-billion funding proposal to Ola, at a reduced valuation of $3 billion (compared to $5 billion in its previous round).Ola didn't agree and only took $250 million, not wanting to give massive control to SoftBank, multiple people said. The cash position at Snapdeal was now starting to look worrying andorder numbers were slipping. The company was left with about $200 million in the bank and no new capital had come in for about a year while they were being asked to continue spending to grow in the last few months of 2016.

“Snapdeal was asked to spend $50 million every month on marketing and promotions even until January. Somewhere around then they wanted to re-engage with eBay but Flipkart had already started negotiating with the online auction site. SoftBank had started engineering a Snapdeal sale by then,“ another source said

Early Investors Block Investment At Lower Valuation

At the start of 2017, there was another possibility being drawn out. A $50-million-per-month offer by SoftBank, out of which $30 million was allocated to Snapdeal and $20 million would go to Freecharge.Snapdeal would be valued at $2.5 billion. That comittment was changed into a $150-million debt financial proposal which was being dished out by SoftBank. There was chatter building up at this time about how the online retailer's early investors Kalaari Capital and Nexus Venture Partners, which together own about 18% in the company , were blocking the capital infusion from SoftBank on the issue of lower valuation. They'd opposed the $50-million monthly installment, saying a drip feed by SoftBank was going to stir up more uncertainties, some people said.

SoftBank Pushes For Merger With Flipkart

While none of the SoftBank capital came in, by February-March SoftBank had initiated talks with Tiger Global to sell Snapdeal and get a substantial holding in the country's largest e-commerce company. We first reported this in our March 28 edition. This would give Tiger, Flipkart's largest investor, the much needed liquidity after having ploughed $1 billion into the 10-year-old company. Tiger would part-sell its shares to SoftBank and get the Japanese group to infuse fresh cash in Flipkart. The Bengaluru-based online retailer got itself $1.4 billion recently from two of the investors Snapdeal had engaged with (Tencent and eBay), along with Microsoft. In the recent weeks, Kalaari has agreed to sell its shares to SoftBank to get the sale through, Nexus is still fighting for a bigger payout.

Forming An Anti-Amazon Coalition

While the sale looks imminent now, external offers of funding not coming through seem to have contributed to the rapid degeneration of Snapdeal's value as the company's cash position worsened. SoftBank, which wants to put its weight behind only the number one players in the consumer internet space, has clearly reset its strategy for India as its bet on Snapdeal hasn't turned out to be what it had envisioned almost three years back. By backing Flipkart and Paytm with billions of dollars, SoftBank is betting on scale and will eventually look to bring further consolidation in what is still perceived to be a wild and irrationally exuberant internet commerce market.“SoftBank will look to combine Flipkart and Paytm and hand it over to Alibaba. This will emerge as the biggest anti-Amazon coalition not only in India but globally too,“ says an investor on the condition of anonymity .

Sachin Bansal, Binny Bansal, sales director Hari, accounts managers Sumit Anand and Sharauque among other employees have been named in the FIR registered on the basis of a complaint lodged by Naveen Kumar, owner of Indiranagar-based C-Store Company.